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Options : higher call volume does not necessarily mean more call buyers?

Personal Finance & Money Asked by noplace on February 18, 2021

I was readying and article on volatility skew about stock options here and this sentence confuses me "Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls.". I’ve seen situations where you have high volumes but open interest/contracts are dropping. Is this the situation that is being described? If not how can higher call volumes not mean more call buyers?

One Answer

I've seen situations where you have high volumes but open interest/contracts are dropping. Is this the situation that is being described?

No, that is not what is being described. If there is high volume but open interest is dropping, it means that counterparties are closing more option positions (BTC + STC) than they are opening (BTO + STO). Read this if you're not clear on how open interest changes.

"Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls." ...how can higher call volumes not mean more call buyers?

For every transaction there are two counter parties, a buyer and a seller. If contract volume increases, there is an equal increase in the number of contracts bought and sold.

I think that the article is poorly phrased and falls short of a clear description. AFAIC, it's a common mistake to say that price is rising because there are more buyers than sellers of a security. Ten buyers of 100 shares means nothing in the face of one person selling 5,000 shares. It's the net aggregate buying (or selling) volume on one side that moves price if it takes out available size at current price.

I have a number of other issues with the content of the article but I'll pass on them since they aren't directly related to your question.

Answered by Bob Baerker on February 18, 2021

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